Reactions to EPA’s Proposed Power Plant Standards

Mar 28, 2012

Reactions to EPA’s Proposed Power Plant Standards
RFF Feature
March 28, 2012

By Nathan Richardson

Smoke stacksYesterday, EPA proposed long-awaited performance standards for carbon emissions from new power plants. Under the proposal, new power plants would have to achieve an emissions rate of 1,000 pounds of carbon dioxide per megawatt hour (lbs/MWh)—a rate that only natural gas combined cycle (NGCC) plants can meet. This means the rule effectively bans construction of new coal plants, at least until and unless carbon capture and storage (CCS) technology is available.
Understanding the rule, a lengthy 250+ pages, will take time. Some commentary is out already, but if you made plans with an environment wonk this week, brace yourself for them to be cancelled.
What EPA can and should do under this regulatory program has been a major topic of RFF research (see here, here, here, or here, among many other papers and events) over the last few years, once it became clear that the Clean Air Act (CAA) would be the primary venue for federal climate policy. Look for more research and commentary in the near future. For now, some quick observations:
  1. Costs

    EPA claims the rule will have no net costs, because its modeling shows that no new coal infrastructure would be built anyway. Some disagree with this prediction, pointing to—among other things—the fact that at least some coal construction is currently underway (a few already-permitted projects are grandfathered in and don’t have to meet the standard). Look for more soon from RFF on modeling future coal investments.
    But EPA’s prediction raises another question—if the rule has no costs because it causes no change, it can’t have any benefits for the same reason. So why do it at all?
    One reason is to act as a firewall against new coal, even if circumstances change such that it becomes attractive again—think a big upswing in natural gas prices. But if this happens, then the rule really will impose costs. Benefits might exceed the costs, but you can’t pretend those costs don’t exist. EPA analyzed a high-gas-price scenario and found little effect on coal construction, but if that’s true it puts us back where we started: no costs and no benefits.
    There are still good reasons to impose the standards, however. For one, some standard may be legally required—states and environmental groups sued EPA to force it to issue standards, and it agreed to do so in a 2010 settlement. Also, new-source standards are necessary for the agency to move ahead with much more important standards for existing sources (more on those later). But neither of these rationales require the agency to adopt any particular stringency.
  2. Flexibility

    The proposal allows a bit of flexibility. It’s still possible to build new coal plants, but if a firm does so, it must install CCS technology within the first 10 years such that its average emissions over a 30-year time period meet the 1,000 lbs/MWh target. EPA calls this “averaging”, but it’s really just a different compliance track—firms can’t freely average their emissions over the 30-year period, though EPA does seek comment on whether it should allow them to. Even if EPA does allow this, I’m skeptical that any firm would be willing to make such a large, risky bet on CCS . (Note: My RFF colleagues have a new paper on flexibility and its likely role in CCS deployment. I haven’t read it yet but it’s likely to be highly relevant here.)
    The rule does not allow trading between plants or banking of credits between years. There are legal reasons for this, so it is not surprising. But those legal limitations don’t apply for existing sources. When (and if) the agency proposes standards for the huge stock of existing fossil power plants, the presence or absence of trading in some form will have a big impact on the cost-effectiveness of the regulation.
  3. Change

    Despite the 30-year compliance horizon, these standards can and will change over time. EPA must revise the standards every 8 years, and can revise them more often if necessary. This could mean tighter standards over time if CCS or other technologies decline in price fast enough. Or it could mean looser standards if technology does not develop as hoped, or simply under a different president. Eight years of certainty is not that helpful for electric power firms making decisions on plants that will last for decades. But there is nothing EPA can do about this.

  4. Other EPA Rules for Coal

    Within the past year, EPA has also issued rules that target emissions of other pollutants from coal, including nitrogen oxides (NOx), sulfur dioxide (SO2), and mercury. Some in industry have complained about the costs of this suite of regulations. But, as EPA points out in the new proposal, issuing many rules at once is better than spreading them out, since it gives industry greater certainty.
    Normally, plants that make modifications would be treated as new for purposes of complying with performance standards. But existing coal plants cannot comply with the proposed standard. This creates an apparent catch-22: existing plants have to make upgrades, in some cases to comply with the new EPA rules for other pollutants. But if they do so, they’re subject to stringent performance standards they cannot meet.
    EPA, however, avoided this situation by specifically excluding modified plants from the proposed standards. More accurately, it claims it lacks enough information to issue standards for modified plants, though it reserves the right to do so in the future. Given the paradox above, EPA had little choice here. There is some precedent for treating modified sources differently, but this decision may create legal vulnerability down the road. The CAA is explicit that any source that makes a modification resulting in greater emissions is to be treated as a new source, subject to the same standard. EPA will have to find a way around this, perhaps by defining new and modified sources as different regulated categories.

Check back for more from RFF on the rule and its implications in the days and weeks to come.​